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Financing has long been a major issue for people wanting to set up SMEs in the UAE. Especially since the credit crisis of 2008 and 2009, banks have scaled back their lending, cutting off even mature entrepreneurs from cash supply.

However, with the rapid recovery of the UAE economy, banks have stepped up their SME funding again. The Dubai government has also undertaken a number of efforts in recent years to boost the SME sector by making access to funding easier.

However, bank funding alone is not always a viable solution for an SME for various reasons. UAE banks today have to comply with higher tier-one capital holding ratios, which means they conduct more intense risk analyses of SME business plans. Government support for SMEs is more aimed at UAE nationals and less at expats seeking to launch a start-up.

Furthermore, banks prefer to finance free zone companies as the business costs are lower, but this restricts a start-up from carrying out onshore business in the country. Thus, alternative finance has become a necessity now for SMEs.

“There is huge interest in supporting the development of the SME sector, but how to provide those companies cheaper and faster funding still remains far from clear,” said Eugenio Berenga, Managing Director of business consultancy AlixPartners at an SME business panel held in Dubai earlier this month.

New technology will play a big role in future financing of SMEs, says Nasser Saidi, Founder and Managing Director, Nasser Saidi and Associates, and former chief economist of the Dubai International Financial Centre (DIFC). “Businesses of this type struggle to find growth capital, and although angel investing and venture capital play an important role, new concepts such as crowdfunding, which encourage wider investor interest, will help meet the increasing demand,” he says.

Here is a shortlist of various financing options available.

Venture capital

For many SMEs, venture capital funding may serve as the best choice. Venture capitalists can provide early-stage funding, but, in exchange for their invested capital, often expect a stake in a company. Venture capital firms do not provide loans, but they expect a share on the return on investment of the company.

There are a large number of venture capital firms in the UAE, from large, government-funded investment institutions to multinational investment companies, bank-related venture capital firms and privately held investment firms. Most of them can be found in the DIFC.

Pros: No loan costs, proper backing through seed capital with the option of more substantial funding later.

Cons: Venture capital firms mostly want to interfere in day-to-day operations. If things don’t develop as they should, financing can quickly dry up.

Private equity/family offices

Private equity is a popular way of financing in the cash-rich Gulf states, where wealthy individuals or family offices are always on the lookout for opportunities.

Private equity firms are important suppliers of capital for SMEs and derive the majority of its investors from international markets, whereas managed family offices are mainly backed by regional high-net-worth individuals or families that seek a place to grow their money. Dubai is now also preparing to launch the first equity market in the Middle East dedicated to SMEs and aimed at private capital, potentially giving flourishing entrepreneurs access to millions of dollars to help them grow.

Pros: Individual finance from wealthy investors with little interference in daily business. No restrictions.

Cons: Capital can be quickly withdrawn if the business does not develop.

Crowdfunding

Crowdfunding is a new capital-raising strategy using social media on the internet. Investors can buy small stakes in ventures through various websites. This way of funding has become an increasingly popular way of raising money, particularly for SMEs seeking smaller investments to launch their business, and additional follow-on funding required for rapid growth may come from other sources. If the business succeeds, the value of the stakes 
goes up.

“Crowd investing enables new and existing businesses to raise money in small chunks from large numbers of investors in exchange for equity,” says Chris Thomas, CEO of Dubai-based crowdfunding platform Eureeca. “Essentially, it is demystifying the world of investment banking and venture capitalism and making investment opportunities far more accessible.”

Pros: Ideal for SMEs in need of smaller start-up funding, availability of a broad network of small 
investors.

Cons: Long-term viability, business plan or project details need not be given on the internet.

Barter deals

Start-up businesses can also be funded by barter transactions, which mean to trade products against products and services against services. For example, office space can be bartered against marketing services, a website can be built for a law firm in exchange for legal services, office furniture can be bartered against phone systems — and all this 
can be done via numerous barter websites where trade credits are used as a form 
of currency.

Pros: A smart and creative way to save capital, building business relationships from the start and freeing up cash for future investments.

Cons: Barter partners can go bankrupt or discontinue their business, so a start-up may never receive its share of the barter. Not suitable for industries where prices change rapidly.

Other options

These include peer-to-peer funding, a process whereby a group of people come together to lend money to each other in small business groups or in ethnic groups. SME-focused organisations or state institutions also offer grants for certain type of businesses, such as eco-friendly ventures or creative technologies. Micro loans are another 
option for small 
companies.